When Do You Need Life Insurance?

You’ve got a lot on your mind when you finish college or graduate school. You’re starting a career, making your way in the world, trying to figure out if you can still fit a morning latte into your budget.

The last thing you’re thinking about is life insurance. That’s for people who are married and have kids, right?

Right. But there some reasons why young professionals should consider it, too.

If you die, life insurance can serve as an income replacement, so your family doesn’t have to worry about coming up with money for your debt and everyday expenses while dealing with your loss at the same time.

But when’s the right time to buy life insurance? Well, that depends on the financial needs of you and your family. When debating when you should buy life insurance, consider these major financial obligations.

Student Loan Debt

So, you’ve heard the news that student loan debt in America has reached $1.3 trillion, right? You might be wondering what that has to do with life insurance. After all, if you die, don’t you just take your student loan debts to the grave with you? Short answer: not necessarily.

Depending on the type of loan you have – federal or private, cosigner or no cosigner—someone may still be on the hook for your debt if you die. And since you probably got that loan when you were still in your teens or early 20s, that “someone” is likely your parents.

Federal loans are discharged upon a borrower’s death, but the rules for private loans are determined by the individual lender. You should ask your lender(s) about their policies if you don’t already know what they are. (Earnest will discharge loans in the event of the untimely death of a borrower.)

It’s not a terrible idea for parents to buy life insurance for their children if they’ve cosigned their loan. If you’re the new grad, though, and you’re taking on the responsibilities that come with an adult (like the exciting world of paying off student loan debt), consider buying life insurance if your student loans are private. A healthy 25-year-old woman may be able to get a 20-year, $25,000 policy for under $10 a month, so a small policy to protect against debt is relatively affordable (and you may be able to get it without taking the medical exam; talk to an agent or broker about that).

Other Debt

When young professionals are making their way into the real world, student loan debt is the type of debt they’re most likely up against. But as the years go on, you’ll probably find yourself facing other types of debt quickly. Your family might find themselves on the hook for credit card and auto loans that were in your name.

Most long-term debt outside of student loans takes the form of a mortgage and car payments. It’s smart to buy life insurance for a term that’s long enough to cover your longest financial obligation, and a 30-year term life insurance policy lines up nicely with a 30-year mortgage. Add in the six to seven years it can take to pay off an average car loan, and you can see why it’s so important to have a financial safety net.

If you’re the breadwinner for your family, a life insurance policy can help prevent them from needing to turn to credit cards to cover expenses after you’re gone. Considering the average American household already has over $15,000 in credit card debt, this can be a welcome relief.

Kids and Other Dependents

To make things easier, you can boil this down to a single point: if you have kids, you need life insurance. But even if you don’t, you might want to consider it.

It can cost over $245,000 to raise a child to the age of 18. They need clothes, diapers, bottles, and toys, obviously. But are you going to need to pay for a nanny or daycare? What about activities like summer camp? Then there’s college, which is estimated to cost two to three times more in 2028 than today. Even if you’re budgeting wisely and taking advantage of things like 529 savings plans, you’ve got a lot to plan for when it comes to your money and your kids.

Beyond children, you may also need to consider other dependents like aging parents who might be relying on you for support. A reported 10 million millennials act as caregivers for adult family members in America. When you’re figuring out when you need to buy life insurance, think about all the people who depend on you and how losing you might affect them financially.

Why Buy Early

When you should buy life insurance—and how much—depends on the financial obligations we’ve discussed. But when it comes to actually buying it, there are two ways you can make sure you’re getting the most out of your dollar: buying early and buying smart.

What most people don’t realize is that your life insurance rates are locked in once your policy goes into force. That means if you get a 30-year term policy, the price you pay when you’re 25 is the same as when you’re 55. Many people also don’t realize how affordable term life insurance is—especially compared to whole life insurance, which can cost up to four times as much.

Keep in mind that as you age you’ll need less life insurance protection. Kids graduate from college and move out, mortgages get paid down, and if you’ve saved wisely in IRAs, 401(k)s, and other investments, your assets should be better able to cover your liabilities.

A Strategy for Buying Life Insurance

So how do you plan out your life insurance policy in a way that gives you the most bang for your buck? You might consider using the “ladder strategy.” This strategy lets you layer multiple policies for different periods of time and can save you 50% on your premium payments over the years. Let’s look at an example.

You’re 36, and you know that you’ll have a lot of expenses in the coming years, with two kids, a house, and the last bit of your student loans. But instead of buying one 30-year term life insurance policy, you might buy three separate policies:

The first is a 10-year, $500,000 policy. This will ensure that if the worst happens, your family doesn’t have to worry about day-to-day costs or losing their home or college opportunities.

Then, you get a 20-year, $300,000 policy. After 10 years you’ve paid off a good chunk of your mortgage and your student loan debt is gone (congrats on that, by the way). But college is still on the horizon for your kids, and while you don’t need as much protection, you still need something in place.

Finally, you stack a 30-year, $200,000 policy on top of that. Your 10- and 20-year policies will have expired at this point, but you’ll still have $200,000 to finish paying your mortgage and help contribute to, say, retirement savings for your partner.

By having multiple policies in place, you’re getting $1,000,000 of total protection when you most need it—when you have a lot of liabilities—but you’re stepping down the ladder at different intervals so that your coverage matches your needs. According to numbers from the PolicyGenius life insurance quoting engine, while a single million-dollar policy can cost over $27,000 over the term, using the ladder strategy you could end up paying just $13,500.

When do you need life insurance? The real answer is as soon as possible. Even if you don’t have the immediate expenses that are associated with needing to provide financial support, it never hurts to plan ahead. Buying life insurance when you’re young and being smart about the policy (or policies) you’re buying by accounting for future needs can give you peace of mind without busting your budget.

This is a guest post contributed to Earnest. Colin Lalley writes for PolicyGenius, a digital insurance brokerage trying to make sense of insurance for consumers, where he writes about personal finance, insurance, and reducing the risks in life.